Locating Growth Capital During A Banking Crisis

Posted on: April 25th, 2023

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Fast growing companies require a steady diet of growth capital to support investment and working capital. Unless properly capitalized, fast-scaling businesses can easily outstrip their cash liquidity and hit the wall with negative consequences. During expansionary periods when the economy is rosy, growth capital is available in many forms such as lines of credit, revenue-based finance, venture debt, growth equity and mezzanine-based debt. There is an overabundance of lenders and investors across the spectrum ready to address your capital needs.

When the economy stumbles as it is today, lenders increase their risk premium and decrease their risk appetite leading to rapid contraction in available growth capital credit. This is especially true for growth capital providers whose business models depend on low interest rates and low economic volatility. These types of lenders cannot absorb higher interest costs into their return models and end up lending to weaker credits with larger loan loss probabilities. Locating growth capital during a banking crisis requires market insight. Understanding the market cycle for each lending segment and lender in your search universe is key to successful growth capital location.

Each segment has a characteristic pattern of activity that provides clues as to how willing they are to lend. Banks usually go overboard and make too many loans when the economy is strong. They put out too much money too quickly and then must pull back. Non-bank asset-based lenders usually wait out the early innings of an expansion and enter later in the game when collateral values are higher. Mezzanine debt lenders are usually cycle agnostic and are more influenced by their fund timelines.

Within each segment, lenders can be further divided into older lenders and new lenders. Older lenders have portfolios of loans, some of which may be stressed. They are usually more focused on their portfolio problems than they are on booking new loans. Brand new lenders have no portfolio problems and are only looking to book new assets, which makes them an ideal target. While the market conditions may be challenging now, finding a new lender in the proper growth capital segment will ultimately lead to long-term funding success.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.